Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 13 september - 17 september 2021

Global Markets Retreat Amid Conflicting Data Readings

Major global indices ended the week lower as investors processed some encouraging economic data against worries about supply chain challenges, elevated valuations, and concerns over how the equity market would respond to an eventual tightening in monetary policy. The S&P 500 index ended the week 0.6% lower.

Moving on to Europe, eurozone bond yields rose in tandem with US Treasuries, with the Financial Times reporting that the European Central Bank is expecting to meet its 2.0% inflation target by 2025 and is on course to raise interest rates in about two years, significantly ahead of consensus expectations.

In China, industrial output and retail sales missed expectation, particularly retail sales, which recorded its slowest growth pace since August 2020.

Asian Equities Slip on Evergrande & Casino Tightening Fears

Asian equities were weaker with the broader MSCI Asia ex-Japan index closing 2.7% lower as contagion fears on Evergrande’s spiralling debt spooked markets. China’s stock market bore the brunt of the selloff last week as Macau also kicked-off a public gaming consultation period that could result in tighter regulation in the gaming sector.

Concerns on Evergrande’s mounting debt crisis sent chills down investors’ spine as protests erupted outside its headquarters. The cash-strapped property developer faced off over 100 disgruntled investors who crowded its lobby to demand repayment of its loans and financial products according to news reports.

With US$300 billion in liabilities, a collapse of the company could send reverberations across the financial system and credit market. However, the total loans only constitute 0.2% of the country’s banking system and is unlikely to be a systemic risk. It will be more important to monitor the government’s policy response in protecting various stakeholders across the supply chain such as suppliers and customers.

Meanwhile, Macau began a 45-day public consultation of the gaming sector which includes appointment of several government representatives to the panel. This led to concerns of increased regulatory tightening in the sector similar to what happened in the online gaming industry where teenagers were only allowed to play 3 hours per week. However, this is still preliminary, and we will continue to monitor developments closely.

Whilst volatility could persist in China as authorities look to rein in various industries such as technology and entertainment that are not deemed to be aligned with its ‘common prosperity’ policy aims, there are still pockets of opportunities.

Strong consumer names like Mengniu and Li Ning could benefit from an increased push by the government to promote local brands as well as a bourgeoning middle-income class. Industrial companies may benefit from an ongoing automation push. The renewable energy sector is also seeing strong support from policymakers’ intent on reducing carbon emissions.

Outside of China, the rest of Asia has held up relatively better such as ASEAN and India. The number of COVID-19 cases has come off its peak and vaccination rates have ramped-up significantly. More parts of the economy are expected to re-open, and we could see improvement in growth.

On portfolio action, we initiated a new position in Syneos Healthcare which conducts clinical trials for new drug developments. With technological advancements that have resulted in lower costs for genome analysis, the number of drug developments is expected to climb which is positive for the stock. We also added exposure in JD.com which has the right logistic asset mix to benefit from an e-commerce boom in China.

Updates on Malaysia

On the domestic front, the local market continued to consolidate with the benchmark KLCI ending the week 1.7% lower. The recent memorandum of understanding (“MoU”) inked between the government and opposition has led to a temporary ceasefire and some political stability. Part of the bipartisan agreement reached by lawmakers include parliamentary reforms, strengthening institutions, and enactment of an anti-hopping law.

However, other clauses of the MoU included efforts towards exempting interest payments under the loan moratorium in 4Q2021 as well as discussions of a potential windfall tax which dampened market sentiment.

On COVID-19 developments, the vaccination rate for adults has hit close to the 80.0% mark. The number of daily new cases has also fallen below 15,000. As more parts of the economy are set to reopen, we could see a more sustained recovery.

On corporate news, Top Glove released its recent results which came in below expectations. Earnings was impacted by temporary disruptions to its operations due to factory closures during the EMCO period. Despite the recent correction in the rubber glove sector, we are not looking to add back position due to a lack of catalysts as demand for gloves normalise and average selling prices (“ASP”) return back to pre-pandemic levels.

Fixed Income Updates & Positioning

The Asian credit space endured a softer session for the most part as news flow surrounding China’s Evergrande Group continue to dominate headlines. Throughout the week, credit spread for Asian HY segment widened by some 61 bps to +929 bps, while IG names were relatively more resilient with spreads widening only by 1 bp to +122 bps.

More pressure is piled onto the already troubled Evergrande last week, in particular its wealth management division this time around, following news that the company is unable to meet payment obligations to investors of its wealth management offerings. While Evergrande’s liquidity woes isn’t entirely new at this point, whispers that management level employees were able to redeem their investments on the said products did little to quell the uproar amongst public investors – hence the protests across the many offices of Evergrande last week.

Evergrande has since vowed to meet all payment obligations on its wealth management offerings, though this remains to be seen.

Attention will undoubtedly be zoomed in on Evergrande’s upcoming USD bond coupon pay-out coming 23 and 29 September 2021. Should it fail to meet these payment obligations, the company would be granted a 30-day grace period before a case of default is minted. Though considering that the company has recently admitted that fundraising efforts have been subpar, majority of the market appears to be convinced that a default is on the cards.

We would like to reiterate that our regional portfolios do not hold any exposure to Evergrande. We remain cognisant of the volatility in the near-term – especially within the Chinese HY property space – and will opt to remain prudent in our approach as well as credit selection.

Back home, local government bond yields trended higher in the week as investors reacted to the cabinet’s proposal of increasing Malaysia’s statutory debt ceiling to 65.0% (from 60.0%) of GDP. This would see the government’s debt limit increase by approximately RM60-70 billion.

Though we believe the move to be a necessary one in allowing the government more spending room to better deal with the economic fallout brought forth by the pandemic; and is largely in line with the cabinet’s other proposal of expanding the government’s COVID-19 fund size to RM110 billion (from RM65 billion). In a statement, Finance Minister Tengku Zafrul Aziz said that the two proposals will be tabled to parliament in October 2021 for approval and are aimed at strengthening the public health system, improving social relief measures, and providing support to businesses.

In other news, the local primary market was introduced to a new 10-year MGS benchmark last week. Total issuance size was RM5.5 billion, of which RM1.5 billion was privately placed by Bank Negara Malaysia (“BNM”) while the remaining RM4.0 billion was allocated for the public auction. The public tranche posted a bid-to-cover ratio of 1.6x, which – albeit decent – pales in comparison to the YTD average coverage of 2.2x. The 10-year MGS yield closed the week 7 bps higher to 3.32%.

Moving on to the corporate segment, some buying interest were seen within government-guaranteed (“GG”) space early on, though yield levels ended the week about 2 to 3 bps higher on average, in line with the movement in government bond yields.

Portfolio action wise, we continued to take profit from some of our tactical positioning in govvies and Private Debt Securities (“PDS”) last week, which we’ll look to redeploy into upcoming primary names that we are comfortable with given that demand is still fairly healthy for the primary segment. Currently, overall cash level is within the 4.0-8.0% range for our local fixed income funds.

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